According to Fed Chairman Powell, the economic reopening could temporarily stimulate inflation
Federal Reserve chairman Jerome Powell said Thursday that he anticipates some inflationary pressures in the coming period, but that it is unlikely to be enough to stimulate the central bank to hike rates.
“We expect inflation to rise once the economy reopens and hopefully base effects pick up,” Powell said at a conference in the Wall Street Journal. “That could put upward pressure on prices.”
Markets reacted negatively to Powell’s comments, with stocks sliding and government bond yields jumping. Some investors and economists had been looking for him to cope with the recent rise in interest rates, with a possible hint of an adjustment to the Fed’s purchase program.
The Fed is currently buying $ 120 billion a month in government bonds and mortgage-backed securities. Most recent market talk has centered on the central bank, which may be implementing a new version of Operation Twist in which it sells short-term debt and buys longer-term bonds.
According to Fed officials, despite expectations from economists and Wall Street strategists, the central bank is far from taking action to affect the long end of yields, CNBC’s Steve Liesman reported.
Instead, Powell reiterated earlier statements on inflation, saying he did not expect the price hike to be long-lasting or enough to turn the Fed away from its accommodative monetary policy. He found that the rise in yields caught his attention, as did the improvement in economic conditions.
“There are good reasons to believe that the outlook will be marginally more positive,” he said.
The Fed expects inflation to be around 2%. In their view, this rate signals a healthy economy and offers room for interest rate cuts in times of crisis. However, the rate has dropped below that for most of the past decade, and inflation has been particularly weak during the coronavirus pandemic.
With the economy increasingly back on its feet, some price pressures are likely to emerge, Powell said, but added that they are likely to be temporary and due to “base effects” or the difference from last year’s depressed levels as well will look like the Covid-19 crisis began.
An increase in interest rates would require the economy to return to full employment and inflation in order to reach sustainable levels above 2%. He also doesn’t expect that to happen this year.
“There’s just a lot to do before we get there,” he said. Even if the economy “sees temporary increases in inflation … I assume we will be patient”.
The Fed has repeatedly stated that it will anchor short-term rates near zero and continue its monthly bond purchase program until it sees not only low unemployment but also a rebound in jobs that are “inclusive” across income, gender and race lines is.
However, some economists have feared that the Fed’s commitment to low interest rates will fuel inflation. Powell said he was “very aware” of the lessons of the runaway inflation of the 1960s and 1970s, but believes the situation is different.
“We’re very attentive and I think it’s a constructive thing for people to point out potential risks. I always want to hear that,” he said. “But I think it’s more likely that what happens in the next year or so will cause prices to go up, but not to go up, and certainly not to the point where they would move inflation expectations well above 2%.”